NEW YORK–(BUSINESS WIRE)–October 29, 2013–
A new SEC initiative that will pave the way for individual investors to participate in crowdfunding – Internet-based fundraising for young companies – may also expose investors to potential frauds, according to Randy Shain, founder of BackTrack Reports and an expert in investigative due diligence for the investment community.
The provisions under the JOBS Act will make it easier for smaller and newer business to raise funds, certainly a worthwhile goal. Still, Shain believes that before committing capital, investors, particularly unaccredited ones (those with less than $100,000 in net worth and annual income), need to take multiple steps to ensure they know who they’re investing with. Otherwise, they might see their money quickly disappear.
Shain urged investors to demand the highest level of background due diligence from the crowdfunding sites. He noted that until the SEC mandates professional-level searches, similar to what it demands of underwriters in public stock offerings, investors are at the mercy of the sites they visit.
“It’s not as if all businesses seeking to raise money via crowdfunding will be crooks. The majority will be law abiding folks looking to do right by their investors and themselves. That said, so much depends on the individuals who are launching these enterprises,” said Shain. “Experience shows that individuals who have had issues in their careers or who are untruthful often end up running their business unethically. What’s more, as we saw with the cases of Bernie Madoff and Allen Stanford, regulators are woefully inadequate at detecting frauds before they occur. Due diligence means due care, not do as little as you can get away with.”
In reading the SEC’s proposed rules on crowdfunding, Shain said it is clear the government understands that background searches are going to be necessary here, but that they have no idea what that really means.
“Doing the bare minimum proposed by the SEC, such as checking credit reports, license, corporate standings and even doing court searches, for a few hundred dollars, would be an appropriate measure for the crowdfunding sites to use when hiring a secretary,” Shain said. “But believing that this type of search will ferret out an entrepreneur intent on scamming the public is folly.”
“The crowdfunding sites must go further and conduct due diligence the proper way. This includes searching news databases comprehensively, conducting both manual and online court searches, retrieving court records, and analyzing all that material to determine both whether it relates to the person in question as well as whether it’s important. While this process is not cheap, unless crowdfunding sites themselves take responsibility for assuring the background of the business people they are helping to launch, how will investors really understand the risks of their investment?”
Randy Shain, 212-620-9700 ext. 6507